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Hedging its Bets

Garuda Signs a Cross Currency Swap in Anticipation of Swings in International Currency Exchange Values


Bali News: Indonesia, Cross currency Swaps, hedging, Garuda Indonesia, Bank Negara Indonesia, State Owned Companies, Suwoko Singoastro, exchange rate fluctuations
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(6/29/2014)

Bank Negara Indonesia (BNI) and Garuda Indonesia have entered into a currency swap agreement in anticipation of continuing fluctuations in the exchange value of the Indonesian Rupiah.

As reported by Bisnis.com, the move by the National Flag Carrier represents a rare move by a State-owned company in undertaking a hedging financial instrument. The air carrier earns revenues in both Rupiah and U.S. Dollars, while many of its expenses (e.g. fuel and spare parts) are tied to the U.S. Greenback.

BNI’s director of treasury and international finance, Suwoko Singoastro said the bank was cooperating with Garuda via a cross currency swap (CCS) to a value of Rp. 500 billion (US$41.6 million) for a period of 3 years for serving their principal and interest on their loan portfolio.

“This is to mitigate against the risk of fluctuations in the exchange value of the rupiah when mismatches occur in the flow of two currencies,” Suwoko explained.

He said hedging is done to confront uncertainty in the international currency market that can have a negative impact on the Indonesian domestic economy.

There is an expectation that the U.S. Federal Reserve will increase the interest rate that could result in withdrawal of foreign currency form emerging markets.

The hedging transaction freezes values at the point in time when the cross currency swapwas established, in this instance  June 9, 2014.

According to data from Bank Indonesia, there are only two State-Owned Companies (BUMN) that have undertaken hedging transaction, although BUMN companies are allowed to do so under a regulation introduced in 2013.

Through May 2014, the average amount of foreign currency transaction in Indonesia averaged US$5 billion per day. Meanwhile Singapore averages US$300 billion each day, while Thailand and Malaysia averages foreign exchange transactions of US$12 million per day.


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